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Where’s Your Note?

At the heart of the current foreclosure fraud scandal is an obscure piece of paper — dramatically titled the “note” — that proves how much a borrower owes a lender, and sometimes specifies what collateral the borrower has put up for the loan. In the case of housing, this note specifies the size of the mortgage and and obligates the borrower to pay up; otherwise, the lender gets the house.

Normally, these mortgage notes are not a problem — they’re legally filed with the lender and the borrower, along with all of the other mortgage paperwork. Enter the securitization process, wherein investment banks buy up lots of mortgages from lending banks, bundle them into mortgage-backed securities and sell them to investors. All of a sudden, those notes are missing. A lot of them. And that clouds who owes what to whom, and who has the right to foreclose.

Instead of doing the proper paper shuffling with hundreds of thousands of mortgage notes, investment banks created an online system called MERS, the Mortgage Electronic Registration System, to keep track of the mortgage documentation. The problem is that MERS does not have the same legal standing as all those bits of paper. Banks that lost track of notes and were relying on MERS to ascertain their right to foreclosure are in the wrong, in the eyes of the law.

“Let’s say I borrow $100,000 from you to buy a house,” Janet Tavakoli, the president of Tavakoli Structured Finance, Inc., explained to me yesterday. “You’re my private banker. You’re smarter than most bankers, so you insist that we record everything properly, showing that you have a lien against my house. This is basic banking. It’s not rocket science. It’s tedious, but you’re a banker and that’s what you get paid for.

“Now, let’s say that you never properly recorded our loan and your right to my property, but you still try to show up in court to try and foreclose on my home, if I stop paying you. The judge is going to tell you that you can’t foreclose. I might owe you money — that’s not in dispute. But you can’t just come take my house.”

She continues: “The banks are basically saying: We had sex, that means we’re married! That doesn’t stand up in court. They didn’t get the paperwork correct, which they were obliged to do, and they sloppily sold it to other banks and investors.”

Following mortgage notes is tedious. It is confusing. But it is important. And this week, a coalition of unions and housing advocates, led by the SEIU, launched a campaign to help regular homeowners find their mortgage notes — and to figure out who really holds the right to their mortgage payments.

At the site www.wheresthenote.com, homeowners give their name and address, and identify their lender. The site then spits out a form letter requesting information about their mortgage note. Thus far, a number of folks have apparently gotten responses back. More on that later.

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